PERE Asia: Chinese outbound capital to extend to periphery RE

Chinese investors and developers investing overseas also are willing to buy non-traditional real estate for the returns they want, delegates heard at the PERE Summit Asia in Hong Kong.  

Chinese capital going to Western markets may have to be more careful about what kind of assets it goes into and consider more “periphery” property investments as well as to accept a lack of knowledge about Western real estate practices, delegates heard today at the PERE Summit Asia in Hong Kong.

Chinese investment overseas “comes in waves,” according to Goodwin Gaw, managing principal and chairman of Gaw Capital Partners, and the most recent wav had come in the form of Chinese developers. Indeed, KPMG real estate global chair Andrew Weir added that in Australia, some domestic investors are even pulling out of bidding for certain projects as Chinese developers become more aggresive.

However, Gaw also explained that the cultural gap between Chinese developers and their partners in the US is stark. Chinese developers are used to being the heavyweight and having incredible influence in their home market, and are often shocked to find that can’t be replicated in markets like the US or Europe.

“These guys are used to being the big boys in China, and saying, ‘I bought a big piece of land, and you want me, so I’m going to do what I want,’” Gaw said on the Asia Outbound panel. “They come in thinking they’re going to build mini-China cities, but they have to deal with how the local politicians feel, environmental studies, traffic studies, and a lot of things they’re not used to.”

In general, Gaw said that Western markets tend to be much more document-focused than Asia. Lease renewal costs are also generally higher, taxes are more complicated, and landlord power is limited – all cultural differences that can be quite frustrating for Chines investors even for assets as supposedly straightforward as office, which made up more than half of Asian outbound investment in the first half of 2013.

“Core assets are becoming too expensive,” Hing Yin Lee, senior executive director for real estate at Ping An Trust, added on the panel. “I’m not sure if too much capital is chasing too few assets – we may need to look at periphery investments like non-traditional assets.”

For example, Lee said that hotels used to be one asset class that Ping An would avoid because it wasn’t core. However, Gaw Capital recently exited some hotel assets at “juicy profits,” and now Ping An is starting to consider investing in hotels, he admitted.

Colliers International managing director Terence Tang also cautioned that the window for Asian outbound investment might not be open forever. As the Western markets recover, domestic investors could decide to come back to their home markets full force, and the risk-return profile for Asian investors would no longer be as attractive.